FEATURE
Separation sense- private family solicitor Jessica Inman, of Tilly Bailey & Irvine( left), with tax manager Emma Ambler, of Baines Jewitt.
PICTURE: CHRIS BOOTH
A breakup blueprint from Teesside law and tax experts
Divorce: tax considerations
With tax rules evolving regularly, navigating the financial side of divorce can be complex and overwhelming. Specialist private family solicitor Jessica Inman, of Tilly Bailey & Irvine Solicitors, joins forces with tax manager Emma Ambler, of Baines Jewitt Accountants, to explore some of the most common tax issues that can arise when negotiating a financial settlement during divorce proceedings.
Stamp Duty Land Tax( SDLT) While SDLT does not directly relate to divorce itself, it may, however, become a relevant consideration depending on how the family home is dealt with.
In certain circumstances, it may be appropriate for there to be a deferred sale of the home so that one party is able to remain in the home and for the home to subsequently be sold upon future“ trigger events” arising. Where children are involved, this often includes the youngest attaining the age of 18 years or completing education. However, each case falls on its own facts.
Jessica says:“ This type of arrangement has its benefits, such as allowing the children of the family to remain settled in the home, but it may well come at a cost to the spouse leaving the property should they wish to purchase a new property for themselves.
“ With a deferred sale, the spouse leaving the property will likely remain a legal owner if, for example, the spouse cannot be released as signatory to the original mortgage by the other spouse.
“ The consequence is that any future purchase may be treated as a second property purchase and will be subject to a higher rate of SDLT. This should not act as a deterrent altogether, but it should be borne in mind when negotiating a settlement.”
Capital Gains Tax( CGT) The disposal of the former matrimonial home on divorce can give rise to CGT, particularly in relation to what is known as Private Residence Relief( PRR).
Emma explains:“ This is a relief on your main home so that if there is an increase in profit upon disposing of the property it should not attract a tax liability. Additionally, transfers between spouses / civil partners can be made on a‘ no gain / no loss’ profit basis for up to three years following the year of permanent separation.
“ After this period, disposals of an interest by one spouse- for example, by transferring their interest in the property to the remaining spouse- can potentially trigger a tax liability. This can be avoided if the transaction is subject to a financial order made by the court within divorce / dissolution proceedings.”
Since April 2023, changes under the Finance Act 2023 have enabled a departing spouse to potentially claim the main residence relief( PRR) for the period between moving out and disposal of their interest, subject to certain criteria being met.
Emma adds:“ Given the complexity and potential for unforeseen tax liabilities, specialist advice is essential.”
Income Tax If the“ matrimonial pot” includes incomeproducing assets, such as shares, it is important to bear in mind that this may attract income tax. If such assets are transferred as part of the settlement, the receiving party becomes liable for tax on any income from the date of transfer.
Jessica says:“ This potential tax burden should be factored into the overall settlement as it may affect the net benefit and perceived fairness of the agreement.”
Summary In summary, Jessica and Emma advise that it is therefore crucial that both specialist legal and tax advice is sought to ensure that any settlement accurately reflects the parties’ intentions.
Emma adds:“ Engaging specialist advice early in the process not only helps to identify potential liabilities and avoid unintended consequences but can also identify potential exemptions or reliefs that may apply and ultimately change the landscape of negotiations for the divorce settlement.
“ The above are a few examples only but demonstrate that, while it might not be your first consideration when divorcing, overlooking issues such as this can lead to unexpected tax bills that may ultimately affect the fairness of the settlement.”
Please contact Jessica Inman of Tilly Bailey & Irvine LLP on 01740 646034 or Emma Ambler of Baines Jewitt on 01642 632032 for further information.
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